New Highs for Volatility-Weighted ETF

A variety of exchange traded funds hit record highs Thursday as U.S. stocks rebounded. Count the VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA) among those funds. CFA’s ascent to new highs stretched the fund’s year-to-date gain to over 16%.

“The VictoryShares US 500 Volatility Wtd ETF offers exposure to large-cap US stocks, without subjecting investors to the inherent limitations of traditional market-cap weighting. It seeks to provide investment results that track the performance of the CEMP US Large Cap 500 Volatility Weighted Index before fees and expenses,” according to VictoryShares.

Low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research. However, CFA is more than just the standard low volatility ETF.

CFA offers a different approach to U.S. broad market exposure. Investors embracing cap-weighted S&P 500 ETFs are not always getting the diversity they think they are. For example, the 50 largest S&P 500 stocks account for about half the index’s weight. This year, the index’s top 10 holdings account for about a third of its performance.

Traditional market cap weighted indexes are typically dominated by the performance and risk profile of a handful of mega-cap companies. The CEMP volatility weighted indexes address that concentration challenge by weighting the stocks in the index based on volatility (standard deviation over the past 180 trading days), thereby offering broader exposure to the entire market.

Related: A Weak Dollar Has Been Good for Large-Cap ETFs

Market segments will perform differently during various economic cycles, and as the U.S. may be heading toward the late business cycle, exchange traded fund investors should consider which areas could drive returns or increase portfolio risks. While low-volatility exchange traded funds may not outperform in a strong bull rally over the short-term, the strategy’s ability to hedge downside risk may be worth it over the long run.

CFA holds over 500 stocks and the ETF’s sector lineup leans toward cyclical fare. Financial services and industrial stocks combine for over 37% of the fund’s weight with technology names accounting for 16.7%. Conversely, CFA’s exposure to traditional low volatility sectors, such as utilities and consumer staples, is relatively light.

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